Tuesday, April 14, 2015

Wage Growth? Context Counts

Adam Ozimek is concerned, and with good reason, about a growing consensus as to the need for wage growth. Why? Because of the terms by which this reasoning is often structured. When one hears arguments for wage growth, are those arguments to increase wages for some? This framing is incomplete logic, because it has nothing to do with wage growth in an aggregate sense.

By no means do specific wage adjustments imply increased growth overall, or an improved economy for that matter. Whereas, increased wages in aggregate would have the potential to move central bankers closer to the normalization they now seek, and improve labor force participation at the same time. The different is important. From Ozimek's recent post:

So when economists like myself argue that the Fed should let wages grow fast before raising interest rates, it sounds like it has a lot in common with the "new consensus" arguments. In fact, it is a distinct case for higher wage growth, and it is quite possible to believe, as I do, that we should be dovish about cyclical wage growth now, but be very wary about trying to mandate higher wages in the long run. Nevertheless, a chorus of economists making the cyclical case for faster wage growth is useful background noise for those making the "new consensus" argument for higher wages.

Ozimek continues:

This is all to say that those who don't buy the "new consensus", again including myself, have a lot to worry about. While you do read pieces that challenge individual elements of the "new consensus"...there is nothing with the same coherent and oft-repeated narrative...Rebuttals are piecemeal, attacking the minimum wage or unions alone, while the new consensus provides a whole story. Just as importantly, those voicing dissent are outnumbered...Nobody else has a very easy-to-tell story right now, or at least those that do have good stories aren't addressing the recent trends in empirical evidence.

He concludes that others need to do a better job of presenting their case, particularly given the fact this will be a substantial part of Hillary Clinton's economic agenda. While her focus is in some ways a positive - especially since little about the economy is actually "back to normal", the context is problematic. Wage growth for "deserving" groups as "new consensus" focuses on minor tweaks to existing equilibrium, rather than much needed overall growth strategies.

For instance, consider how different the market monetarist argument actually is from the "new consensus". What is needed is aggregate wage growth that is capable of assisting labor force participation as a whole. More than anything, the Great Recession was an outcome of the fact the Fed abandoned support for already existing income based commitments, just when they were needed most. Even though aggregate spending capacity has followed a relatively stable path since, there's little guarantee the "new consensus" would contribute to gains for the earlier growth trajectory. Especially since the present cap on inflation, could mean that increased wages for some would (instead) lead to further losses in economic access, for others.

Part of what makes it difficult to provide a cohesive message for wage growth, is the fact that real supply side reform is still needed - not public announcements of intention to come to the aid of a "struggling" middle class. A considerable amount of aggregate supply and demand were destroyed when the Fed took the actions which exacerbated the Great Recession. This lost capacity is still reflected in a marketplace suffering from limited investment, and limited options for both producers and consumers.

While the Fed has long since allowed "bygones to be bygones" (the earlier level of output), residual problems in this regard still thwart their desire to raise interest rates this year. As a result, there has been so much reaction to the Fed's intent, that a "windfall moment" for symbolic wage hikes may well be the result. Just the same, it is difficult to imagine targeted wage hikes as the kind of cyclical response which would have actual impact. Hence there is likely to be confusion as to symbolic wage gains, as opposed to the real wage gains, that would indicate the actual growth environment the Fed - and supply side participants - are still reluctant to provide.